Mortgage and Home Equity Loan Options
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Mortgage vs Home Equity Loan
Mortgages and home equity loans are both means of borrowing that require pledging a home as collateral – property the borrower uses as security for the repayment of the loan.
3 Important Differences Between a Mortgage and Home Equity Loan
1) The term mortgage is typically used when a borrower is purchasing a new home.
- A lender usually allows individuals to borrow up to 80% of a home’s value
- E.g. House is appraised at $150,000, the borrower could take a mortgage for $120,000 and would be responsible to pay $30,000, or 20%, as a down payment
- Some mortgages allow borrowers to take a mortgage without a 20% down payment, but then they must also pay monthly mortgage insurance – PMI – Private Mortgage Insurance
- Typical term is 15 or 30 years and the rate can be fixed or variable
- Mortgages can be refinanced at a later date if interest rates have dropped, for a shorter term or to get cash out of their home
2) A borrower takes a home equity loan when they already own or have equity in a property
3) A home equity loan is also technically a mortgage; in many cases considered a second mortgage, unless the home is owned free and clear
- The percentage you can borrow depends on how much of the home you own
- E.g. If an individual owes $150,000 on a home, but the home value is $250,000, the individual has $100,000 in equity, meaning they could take out a home equity loan for $100,000
- Individuals can take out a lump sum (home equity loan) or as a line of credit (HELOC) and then draw on it as needed
Closing costs may vary.